Gabe Collins is the co-founder of China SignPost and a former commodity investment analyst and research fellow in the US Naval War College's China Maritime Studies Institute.
Dr. Andrew S. Erickson is an Associate Professor in the Strategic Research Department at the U.S. Naval War College and a founding member of the department’s China Maritime Studies Institute (CMSI).

China and the U.S. represent each other’s single most important foreign relationship, yet also each other’s broadest array of foreign policy challenges. While interdependent, since the fall of the Soviet Union they have lacked a common external danger sufficient to incentivize deep cooperation. Now, with China’s rise, both countries are strong simultaneously for the first time. Significant potential exists for Sino-U.S. cooperation, but fundamental differences in political systems, interests, and perspectives will continue to create friction. In 2012, political transitions in both countries will connect bilateral issues to domestic opinion to an unprecedented degree.

Welcome to the “new normal” for U.S.-China relations. Now many challenges directly affect each country’s national interests and politics, yet cannot be easily sidestepped, finessed, or bargained away because of unprecedented participation of domestic actors. Examples include fundamentally different approaches to trade and economic policies, international norms, and relations with pariah states.

American hopes have dissipated rapidly that China would appreciate America’s post-1978 development assistance and simply embrace existing international norms as it developed economically, without seeking to change factors that it perceived to be unfair. China’s expectations of achieving space and influence on its own terms to right past wrongs have not been met. China’s already-limited willingness to reach accommodation with the U.S.—particularly on Asian issues—will probably decline further as it becomes even more powerful. Despite its coincidence with once-in-a-decade Chinese leadership transition, 2012 will signal challenges to come in Sino-American relations.

Political challenges

Sino-U.S. ties have become a complex “frenemies”-type relationship—one where close economic and trade ties coexist with military and strategic competition. Chinese leaders’ preoccupation with domestic politics and bureaucratic procedures will collide with the rapid-solution-driven U.S. political-diplomatic approach. Both governments will almost certainly continue to disagree on what constitutes internationally responsible behavior, e.g., with respect to Iranian and North Korean nuclear development.

While each nation plays a major role the other’s decision-making, it does not shape every decision definitively—domestic issues come first. The run-up to China’s October 2012 political transition will likely delay decision-making, intensify Beijing’s reluctance to compromise and generate intensified clampdowns internally and assertive rhetoric abroad as China faces rising domestic challenges and finds itself constrained internationally.

All this will occur in a growing social media echo chamber, in which netizens and other private actors will have louder, shriller voices. Leaders will be tempted to “ride” these “tigers,” but the costs of “dismounting” to govern effectively will be higher than ever.

Economic challenges

Multiple economic issues will rise to the forefront of the upcoming U.S. presidential and Congressional elections. The most prominent issues are (1) the valuation of the RMB relative to the dollar, (2) the hollowing-out of the U.S. heavy industrial base, (3) China’s inability thus far to effectively protect U.S. intellectual property, and (4) Beijing’s lack of visible effort to curtail industrial cyber-espionage. Electoral pressures will make it harder for Washington to compromise on these and human rights issues. Yet inflation and rising labor costs will make Beijing particularly unreceptive to U.S. trade and economic policy requests.

If continuing financial problems in Europe or other factors trigger a new economic slowdown in the U.S., Beijing could move to further diversify its foreign reserve holdings away from the dollar. China’s Treasury holdings account for a major part of its foreign exchange reserves and Beijing will not want to jeopardize the value of its T-Bills. At the same time, China has leverage due to its ability to put money to work in other ways, such as backing purchases of natural resources and economic assets worldwide or engaging in additional “loans for resources” deals, which may effectively yield higher returns than U.S. financial assets. In short, Beijing’s massive T-Bill holdings provide influence as Washington struggles for fiscal control. As Chinese investors’ work to diversify their holdings, the U.S. is among the countries best placed to benefit from private investments in real estate and other assets by wealthy Chinese.

The larger challenge is that economics has long been the “good” aspect of U.S.-China relations, overshadowing disagreements on diplomatic, military, or strategic issues. Yet with monetary, trade, and IPR issues becoming more intense and painful for Americans, the “special” status of economic relations may be disappearing.

Security challenges

The U.S. will continue reassuring countries like Japan, South Korea, and the Philippines, as well as other ASEAN members, that it intends to maintain—and possibly strengthen—its focus on the Asia-Pacific while trying not to overly antagonize China. The diplomatic dance (backed by credible military power) will be a delicate one, but robust presence increases Washington’s leverage in dealing with China—and, as such, is a force for regional peace and stability.

China’s regional diplomacy will contend that Asia’s longer-term power is China, not the U.S. However, Beijing’s overtures will likely be undermined by its uncompromising approach regarding maritime issues in the East and South China Seas. Pressuring smaller neighbors over areas that in many cases do not have substantial proven energy or mineral reserves contradicts China’s self-portrayal as a benign re-rising power concerned primarily with “peaceful development.” This will continue to motivate regional nations to partner with the U.S. on security issues, even as they trade significantly with China.

Unlike the U.S., China has no formal alliance partners to share security burdens. The “friends” that China chooses, including states like Pakistan, Iran, Burma, and Sudan, are useful as natural resource providers or trade partners, but are actually liabilities for security purposes overall—even if they do provide niche benefits, such as helping to contain India in the case of Pakistan. These realities help to motivate China’s sense of international isolation and fears of encirclement.

Limit tiger feeding

Beijing and Washington have full plates of foreign policy challenges simply dealing with each other, not to mention their other important foreign relationships. Both countries are economically interdependent, and deeply affected by each other’s actions. They can avoid outright conflict, but not bouts of tension or even crises. 2012 will offer continued opportunities, but also specific challenges, for their relationship. Acknowledging this reality frankly, while searching for specific areas of mutual interest, offers the best prospect for maximizing achievements and minimizing problems. Rather than focusing on bridges that will be difficult to cross soon—such as greatly improving military-to-military relations—we suggest focusing on functional areas that rise to the level of national interests for each country, but are less subject to being politicized. The politics of 2012 may limit bilateral relations to modest, trade-focused achievements. But—at a minimum—leaders should avoid aggressively riding the tigers of public opinion only to end up consumed by them.

Gabe Collins is the co-founder of China SignPost and a former commodity investment analyst and research fellow in the US Naval War College's China Maritime Studies Institute.

Dr. Andrew S. Erickson is an Associate Professor in the Strategic Research Department at the U.S. Naval War College and a founding member of the department’s China Maritime Studies Institute (CMSI).